Vanguard takes a chance with new indexing plan

March 08, 1992|By Thomas Watterson | Thomas Watterson,Boston Globe

Early this month, the Vanguard Group, the big mutual fund company in Valley Forge, Pa., will introduce a new fund. That in itself isn't news; the industry rolls out new funds almost every week. But this one will extend the product line for a particular type of investment style -- indexing -- just when some investment advisers are beginning to wonder whether indexing is the wave of the future or a trend of the 1980s that has run its course.

The new fund, the Vanguard Total Stock Market Portfolio, will try to mirror the performance of the Wilshire 5000, an index of the United States' 5,000 largest stocks. For most investors, those issues, covering most large, medium and small public companies, represent the "stock market."

For the first six weeks or so, the fund will be in a "subscription period" to gather money from investors, Vanguard spokesman Brian Mattes says. Then, when enough money is available for investing, portfolio managers will begin buying a representative sample of the Wilshire 5000 stocks.

The idea behind indexing is to design a fund that performs no better and no worse than a major market index such as Wilshire or the Standard & Poor's 500. In the 1980s, indexing was a hot investment trend. From its founding in 1976, the Vanguard Index Portfolio, which nearly matches the movement of the S&P 500, has grown to more than $4.6 billion in assets.

Other funds that have followed an index strategy, or a variation, have also found it easy to attract new money. They include the Composite Northwest 50, a load fund that follows an index of the 50 largest stocks in the Northwest, and the Dean Witter Value Added Market fund, another load fund.

In the last 10 years, the Vanguard Index 500 Portfolio actually underperformed the S&P 500 slightly, gaining 384 percent, compared with the S&P's 405.6 percent, mainly because of the expense of running the fund. But last year, the fund still beat more than 80 percent of the actively managed equity funds.

However, this success coincided with a bull market for big-company stocks that make up the S&P 500. Small-company stocks are doing better than big stocks, and that's when many fund managers tend to shine: They are expected to find the undervalued companies and those with growth prospects, which often describes small- and medium-sized firms.

"Our numbers suggest that in the 1990s, it may be worth your time to do the research to find the better small-company fund managers," says John Rekenthaler, editor of Morningstar Mutual Funds, a Chicago newsletter. Based on results in 1991 and so far in 1992, Mr. Rekenthaler says, S&P 500 index funds are likely to trail the Wilshire 4500 (the Wilshire 5000 minus the S&P 500) and the average equity fund.

"Buying S&P 500 index funds will be a moderately successful strategy in the '90s," he says. "But not wildly successful."

Even investors who like the idea of looking for one of the "hot" portfolio managers to run an actively managed fund might also consider using an index fund as a "core" holding, to make sure at least part of their money is doing as well as the overall stock market.

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